The past two earnings seasons we’ve seen many companies decline even after reporting good earnings and raising forecasts. During my 33 years managing money, this often occurs during bouts of fear. Fear is an emotion and I’ve not found any way to predict when people’s emotions will change. It usually takes something to shake people out of it. I’ve believed we may not be shaken out of the grip of fear until the US mid-term elections in a few months, but July 27 could end up being the day the fear in the markets turns. First, we had two large-cap tech leaders rally after reporting bad earnings reports. The rally started with the notion that their earnings were not as bad as expected. This might not sound like much but in the world of investing it’s a key sign that asset managers look for: a pivot from declining on good news to a rally on not-so-bad news.
Secondly, the conference and remarks by Federal Reserve Chair reminded me of an episode of Schoolhouse Rock (one of my favorite video series ever): “Shot Heard Round the World”. I wish all kids would be shown ‘Schoolhouse Rock’. I still sing some of the songs to myself (“Verbs! That’s what I want to be.”) Back to Chair Powell’s remarks. Finally, he said the Fed will make changes “meeting by meeting”! No more firm calls into the future, no more backwards looking opinions (e.g., transitory inflation) but rather, finally meeting by meeting. The markets reacted immediately to his remarks rallying throughout the day after. Even legendary Double-Line manager, the ‘bond king’, Geoffrey Gundlach, who has been very critical of previous Chair Powell conferences and who not that long ago said publicly that he thought a hard landing in the economy was inevitable, changed from his prior gloom saying on 7/27/22 on CNBC during the ‘Closing Bell: Overtime’ show: “The Fed is no longer behind the curve…. I think we’re a local high if not an all-time high in Jay Powell’s credibility…. I’m going to say a crash landing is avoidable. A softish landing is your best case”. This too may not seem like a big positive on its own, but it’s a real reversal in sentiment towards the Fed, interest rates and the economy. Mr. Gundlach expressed his belief that we’re looking at a mild recession now and no longer a deep recession which he and many others had been fearing recently.
A one-day rally does not a trend make. The previous two Fed meetings and subsequent conferences have produced same-day rallies only to fade away quickly thereafter. Yet today was key in marking what seemed to be the beginning of reversal of sentiment. The next few days of earnings reports and market action will be an indicator of whether this is the case.
I believe we’ll still lots of volatility before the mid-terms and I still believe there could be a violent rally after the mid-term elections. But before today I felt fear would override any news until November, whereas now I feel this could be the turning point in fear’s grip on the markets. In lay terms, to me this means that we could now see a staircase pattern to the upside rather than the down staircase we’ve been riding since November 2021.
Should you have questions on your account or strategies like those I’ve laid out in this update please contact us at your convenience to set up a Zoom call. Please visit www.OxfordRA.com for commentary and future updates.
I remain vigilant seeking out opportunities for you and grateful to work as your advisor. I wish you a joyous weekend ahead.
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